If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at International Distributions Services (LON:IDS), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for International Distributions Services, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.052 = UK£368m ÷ (UK£9.5b - UK£2.5b) (Based on the trailing twelve months to September 2022).

Thus, International Distributions Services has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 13%.

View our latest analysis for International Distributions Services

Above you can see how the current ROCE for International Distributions Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for International Distributions Services.

What Does the ROCE Trend For International Distributions Services Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 9.3% five years ago, while the business's capital employed increased by 42%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with International Distributions Services' earnings and if they change as a result from the capital raise.

The Bottom Line On International Distributions Services' ROCE

Bringing it all together, while we're somewhat encouraged by International Distributions Services' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with International Distributions Services and understanding them should be part of your investment process.

While International Distributions Services isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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